Here's the Deal - February 25, 2025

Economy: In Slowdown

Market Cycle: Bullish Under Pressure

_{Week 8 of 52 for 2024: 15.39% of the way through 2025}

Table of Contents

• Weekly Note:

• Housing reports from the past week.

• Markets:

• Significant Economic Data from the previous week:

• Economic Data to watch this week:

• Earnings this Week:

• WTF of the Week:

• Quote of the Week:

Weekly Note:

The days of “easy money” in the stock market appear to be coming to an end.

For the last 2½ years, you could close your eyes, BTFD (Buy The F*ing Dip), and come out ahead. That approach may not be completely dead yet, but at the very least, its days look numbered.

If this shift is truly happening, then the BTFD market will transform into one where those who thrived on simplistic trading models which ignore the economy, sector rotation, or even basic knowledge of the companies they were trading, will start handing their easy profits over to those with more experience and a willingness to put in the work.

There are times when just about anyone can make money trading, and then there are times when the strategies that worked so well before suddenly lead to catastrophic losses.

Wall Street is littered with stories of traders who made massive sums for a few years, only to later blow up and lose everything. Why? Because they failed to recognize when the winds changed and didn’t adjust their strategy to fit the new reality.

It’s like a football defense built only to stop the run. It might dominate for a few games against run-heavy teams but then gets annihilated the rest of the season by pass-oriented offenses.

Likewise, the biggest mistakes traders and forecasters make are:

• Being closed-minded

• Not understanding the data

• Thinking their opinion matters more than what the market is actually saying

Markets always evolve. The key is knowing when and how to adapt, or risk getting run the f’ over.

That’s when their excuses start.

A great example of this are the people who have called for a housing crash for twelve years straight and still believe they’re right, even as the Case-Shiller Housing Price Index has risen 122.05% over that same period.

Now, those same people have shifted from predicting a crash to speaking out about the housing affordability crisis after warning against buying while prices more than doubled and payments for like kind and quality have skyrocketed.

Even worse, they ignore a fundamental truth: people buy homes based on the payment they can afford, not just the price of the house. This is especially true for first-time homebuyers. The very group these so-called advocates claim to be helping after telling them not to buy when they could have afforded to do so, which also would have locked them into a much lower monthly payment than they will ever be able to achieve again in their lifetime.

It’s a great example of how those who at one point seemed to have the Midas touch, become complete and total frauds in the end.

The point is, once you learn the “language” of the market and economy, it’s best to listen when it speaks.

That’s why I believe it’s time to make some changes to the newsletter in the coming months.

There is so much happening right now, and major secular shifts are underway. The current format may not be as effective in the weeks and months ahead.

Markets now demand much closer attention, and positions need to be examined more often. As it appears that the days where just about anyone can make money trading are coming to an end.

This is standard for a market operating in the latter part of the Slowdown phase of the credit cycle and heading toward a likely recession.

Therefor, I don’t think the current format will serve you as well right now as a slightly different approach will.

Most of the time, the current format works well. But the changes happening now aren’t just cyclical, they’re longer-term (secular) shifts. That’s why I believe it’s important to take some time to explain these topics in greater depth, so they’re easier to understand and navigate in the coming years.

Things like:

• Tariffs and their impact on the economy.

• The Treasury Department’s bond strategy and its effects on markets and economic conditions.

• The current state of Commercial Real Estate and its impact on the economy.

• The ongoing debate over the spending bill and how it will effect the economy and markets.

• The possible tax cut extension set to expire at the end of the year.

The market has spoken. We’re going to choose success and listen.

Housing reports from the past week.

Both Housing Starts and Existing Home Sales for January came in lower than expected last week.

On the bright side, December's Housing Starts were revised upward in the reports.

Right now, Housing Starts is the more important metric of the two because it serves as a forward-looking indicator. As downturns in Construction Employment typically precede recessions.

Fewer homes and buildings being built means less demand for labor. When a strong labor market starts to weaken, layoffs follow. As layoffs increase, less money circulates through the economy, eventually dragging down other industries. This is how Economic Slowdowns turn into Recessions. And during this phase of the Credit Cycle, the construction labor market is one of the best places to watch for signs of further deterioration in the economy.

As for Existing Home Sales, one weak month after three months of growth isn’t a major concern. Especially considering that mortgage rates hovered in the high 6% range and approached 7% throughout the month.

However, as outlined in the 2025 Forecast, if Existing Home Sales remain weak through the Spring, it could weigh on the economy for the rest of the year. In fact, this could even accelerate the arrival of the anticipated recession by a few months.

Markets:

While markets continue to bump into resistance at all time highs, bond prices have begun to outperform US indices since the beginning of the year.

While seven weeks doesn’t mean a new trend is in place, it is certainly something to keep an eye on moving forward as this is the type of thing you see heading into a market “crash” and recession.

As for stocks, they’re having trouble finding buyers at the highs. Worst yet, it appears that the failed breakouts are adding up. “From failed moves come fast moves in the opposite direction.” as the old trader saying goes.

Plus, markets felt as though they “changed” last week. Take that with a grain of salt as it’s anecdotal and tough to quantify to those who don’t participate in markets daily. It could be wrong, but it matches up with what you expect to happen at this stage of the credit cycle.

US markets have been the place to be the last 2½ years, but eventually the gain potential minimizes as prices run higher. So what astute traders and investors do is sell positions which have been big gainers, and apply that capital to other places where potential gains are either larger or safer.

Does this mean that the US is about to collapse and become uninvestable?? Not necessarily.

Think about it; Investors around globe flocked to US investments when the global economy looked the most precarious in 2022. They did not go to China, Europe, or anywhere else. They sent their money to the safest place in the world, the United States of America.

That is what you call STRENGTH.

As the strongest and best investment opportunities become more saturated, other investments options begin to look better.

Now that the US has continued to prop up prosperity around the globe giving some of the less financially stable countries time to stabilize and grow once again, it’s time for investors to apply their capital to other areas which in turn help those places and their populations out as well.

This is actually good for the US and the fight against excessive inflation.

As the dollar has weakened the last few weeks, other markets around the globe have improved and out outperformed US markets. Especially in emerging markets and China. (Before you get all conspiratorial on this, it’s pretty standard stuff and no surprise.)

Does this mean that US stocks markets are on the verge of an imminent collapse? No.

Does it mean that we’re knocking on the door of the worst financial crisis since 2008? No.

Does it mean that the US is about to go into a depression for the first time in almost a century? No.

Does it mean that I cut a bunch of exposure last week and added to defensive plays and other options outside of the US? Yes!!!

One of which was MRK

Another was NEE

Both of which I like above last week’s low.

Significant Economic Data from the previous week:

Economic Data to watch this week:

Earnings this Week:

WTF of the Week:

Quote of the Week:

Final Thoughts

In many ways, writing this weekly newsletter is much more difficult than being a consistently profitable trader. It’s one thing to develop an economic model and trading system, it’s quite another to write it out in real-time in a clear and concise way so that it clears up confusion instead of adds to the frustration of wanting to be in tune with the economic cycles.

To state the current situation as bluntly as possible:

The US is in the twelfth year of a Secular Bull Market.

The US is in the latter part of the Economic Slowdown phase of the current Credit Cycle which began early 2020.

The US is in a Bull Market which began Oct. 13th, 2022. This Bull Market now appears to be beginning to show signs that it is under pressure.

Due to this, money seems to be beginning to flow into US bonds, stock markets outside of the US, especially China and emerging markets. This is helped facilitated by a dollar which appears to be weakening relative to other currencies. (Extremists will say it’s the start of a collapse, but that is surface level thinking. There’s much more at play, and we’ll cover that in a deep dive.)

This is also sending investors into more defensive sectors like healthcare, staples, and utilities.

There’s obviously a lot more to it than this, but it’s a good peak behind the curtain.

To put all of this another way, markets have been like skiing on the “green” runs the last couple of years and are now “blue.” Eventually, it will be a black diamond and then double black diamond before most even realize that the difficulty level changed at all.

Click the Leave a comment button if you have any questions or comments, or need something clarified. Don’t be shy. The main point here is to improve constantly. Questions and comments help us both and tells me what you are interested in learning/hearing more about.

If you enjoyed this post or found it useful, do me a favor and hit the like (heart button all the way back to the top of the post and to the left) and share it with others.

Learn. Improve. Pass on.